Why This Analyst Sees Downside to New Jersey Resources' Valuation

New Jersey Resources Corporation NJR, an energy services company, will likely face two challenges, according to an analyst at BofA Securities.

The New Jersey Resources Analyst: Julien Dumoulin-Smith downgraded shares of New Jersey Resources from Neutral to Underperform and reduced the price target from $43 to $39.

The New Jersey Resources Thesis: The rate case filed by New Jersey Natural Gas will prove difficult, analyst Dumoulin-Smith said in a note. The NJNG rate cases through 2024, according to the analyst, will be critical to the outlook.

The steep rate increase request of about 25% will be scrutinized by intervenors, he added.

Secondly, execution at NJR Clean Energy Ventures, or CEV, is uncertain due to the limited track record from management, the analyst said.

Shortly after the Investor Day, wherein the company outlined its plan for CEV, it postponed its capital expenditure for the venture from 2021 to 2022, citing permitting delays from the pandemic, the analyst noted.

"We suspect this leaves more limited upside to CEV targets especially when considering compensation under the NJ Solar Successor program remains under review at the NJ BPU," Dumoulin-Smith wrote in the note.

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Although spending on RNG and hydrogen could provide for incremental earnings through the forecast period, and remains a key upside to estimates, recent solar execution is moderating BofA expectations, the analyst said.

PennEast, the analyst said, remains incremental to the plan but the pending Supreme Court decision will determine its viability. The path to completion of this too will be difficult, especially with increased scrutiny on the need for natural gas pipelines, he added.

"We see downside to current valuation levels and move to Underperform," BofA said.

New Jersey Resources Price Action: At last check, the stock was down 2.92% at $40.22.

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